This TAXguide collates a broad range of employment tax changes for 2020/21 and looks ahead to 2021/22. Kate Upcraft provides practical guidance on off-payroll working, national insurance exemptions, the employment allowance, termination payments, student loans, RTI matters, statutory parental bereavement pay (SPBP), and summarises benefits and expenses in the context of COVID-19.
We started a new decade in January 2020 with no inkling that this would be an unprecedented year when employment tax took centre stage, but not for any reason that we would have wished, as we all learned new terminology such as ‘furlough’ and ‘reference pay’. Initially it seemed we might be absorbing all this new knowledge for just two or three months but in the end it consumed the whole tax year and the ramifications in terms of compliance will continue for the next six years, long after those who completed the calculations have left positions as jobs are lost and people move on to other roles and to retirement.
Naturally, COVID-19 has led to many other areas of employment tax, in its broadest sense, being impacted, from statutory payments to benefits and expenses. This guide picks up on these areas, as opposed to the calculation and guidance around Coronavirus Job Retention Scheme (CJRS) claims which can be found in our COVID-19 hub. Equally business as usual has had to continue with a number of new developments that took effect as planned from 6 April 2020, and others that were delayed such as the rollout of the extended off-payroll working rules which will be part of the 2021/22 landscape that we will also cover in this guide.
This TAXguide has been written by Kate Upcraft and edited by Philippa Vishnyakov.
Late Budgets and devolution
The decision to call a general election in December 2019 led to the cancelling of the Budget which then took place on 11 March 2020. We were fortunate last year that this had limited impact in respect to employees’ tax codes because the personal allowance did not increase and neither did the 40% tax threshold. The November 2020 Budget has also been delayed until Spring 2021 but with inflation predicting a modest rise in the personal allowance and potentially 40% threshold this could prove more problematic unless payroll software developers and employers are given the relevant information during February, as many monthly payrolls that pay early in the tax year will be run during March. Additionally, not having the Budget pre-Christmas has impacted the announcement of statutory payment rates and recovery amounts, and the auto-enrolment trigger which is tied to national insurance thresholds.
The late Budget also has an impact because of the necessity for the Welsh Assembly and the Scottish Parliament to set their respective rates of income tax based on Westminster’s decisions. Both countries have decided to go ahead with a Budget before the UK Budget, with Scotland’s set for 28 January 2021 and Wales’ set for 21 December 2020. We already have a precedent with late tax changes in Scotland, where employers were instructed by HMRC not to implement these until 11 May this year, even though payroll software developers could have made the necessary changes by 6 April given that the Scottish Parliament announced the changes on 5 March 2020. Payroll software has the functionality to run on the prior year’s tax rates and thresholds after the start of the new tax year for any of the UK countries, with implementation of the new rates instructed by HMRC via the issuing of a form P7X global uplift notice that provides the implementation date and uplift values for suffix codes.
It is preferable to refer to this change of legislation as ‘off-payroll working’ rather than IR35 because IR35 (Chapter 8 of Part 2 of Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003)) will still need to be considered for those workers not caught by the off-payroll working rules when their private sector engager is either classed as small or does not have a UK connection (ie, not UK resident and no permanent establishment in the UK before the start of the relevant tax year).
The off-payroll working rules are contained in Chapter 10 of Part 2 of ITEPA 2003 and were originally due to be rolled out to the private sector from 6 April 2020, with additional rules applying to the public sector which has been subject to Chapter 10 since 6 April 2017. Due to COVID-19 the private sector rollout was delayed to 6 April 2021 and the legislation was updated by Finance Act 2020 (FA 2020). The only change that was implemented for the 2020/21 tax year was that public sector engagers had to select the new off-payroll worker (OPW) marker for any deemed employees being set up on the payroll.
A Tax Faculty webinar considers the final FA 2020 legislation and also HMRC’s guidance, and TAXguide 22/20 gives practical guidance on accounting for off-payroll working transactions.
From 6 April 2021 the following table outlines the responsibilities various parties have in the off-payroll process:
|Engager||Fee payer (if not engager)||Payroll agent for engager||Payroll agent for personal service company (PSC)|
|Assess organisation size and whether has a UK connection for tax year if private sector||Agree engager size and whether engager has a UK connection as this will determine if workers may need to have withholding applied||Agree engager (payroll client) size and whether engager has a UK connection as this will determine if deemed employees who are directly engaged must be catered for by the payroll agent||Agree amount of OPW wages/dividends that can be onward paid to worker tax/NI free (and/or IR35 and non-OPW amounts subject to tax/NI, if any).
Amend average weekly earnings (AWE) in payroll to match the Ni’able pay value paid by the engager/fee payer in the relevant period if worker wishes to receive statutory payments1
|Carry out status assessment of worker – issue SDS (status determination statements) to all inside IR35 engagements||Receive SDS from engager and arrange for withholding||Receive notification of a deemed employee starter to add worker’s details to the engager’s payroll using normal starter process and set OPW marker|
|Handle any appeal received from fee payer or worker||Appeal SDS if reasonable care not taken with decision by engager||If appeal successful ‘reverse’2 payroll|
|Ensure tax/NI withholding applied and pay net fees to PSC, pay VAT and allowable expenses gross to PSC|
|Inform fee payer of end of contract||Report date of leaving and provide P45 to PSC|
Note that the engager could also be the fee payer where this is a direct engagement rather than via an agency.
1 This is because any salary paid to the worker via their PSC will not be subject to national insurance up to the level of Ni’able pay already subject to withholding by the engager. Therefore, if the worker wishes to create an entitlement to any statutory payment from the PSC (as engagers are not obliged to provide any statutory payments to deemed employees), they should discuss with their payroll software provider how to amend the AWE.
2 To ‘reverse’ the payroll in order to be able to repay the withheld tax and NI to the worker and recover the employer’s national insurance for the engager, the payroll record should have a leaving date inserted that is the same as the start date and all the year-to-date values set to zero.
Following a Conservative Party manifesto commitment the primary threshold for national insurance was increased at the start of the 2020/21 tax year to £183 per week. The secondary threshold is set at £169 per week; this is the first time that the two thresholds have diverged for a number of years. The upper earnings limit, the upper secondary threshold, and the apprentice upper secondary threshold were all unaltered at £962 per week and continue to be aligned with the 40% tax threshold.
New national insurance exemptions
For tax year 2021/22 we expect two new employer national insurance exemptions to be introduced.
- An exemption for the first 12 months of employment for a veteran. This will be operated in real time as opposed to year-end manual claim by the employer (except for 2021/22) with the intention that a new table letter will be introduced from April 2022.
- An exemption from employer national insurance for employers operating in Freeports. There is no detail at the time of writing as to how this would operate or what the eligibility would be.
From 6 April 2020 eligibility for the employment allowance (EA) was restricted to employers who have an employer’s Class 1 secondary NI liability of less than £100,000 for the previous tax year and the allowance was increased to £4,000 per year.
As the national insurance exemption has now been targeted, namely at small employers, it has effectively become state aid and must be considered under the de minimis state aid rules. This means at the start of every tax year (or at the point in the tax year that the PAYE scheme wishes to initiate the claim) there are a number of additional questions that must be answered in the employer payment summary (EPS) in addition to making a claim for the year. These are then treated as a legal declaration that the scheme is entitled to receive EA as the employer has at least £4,000 headroom in their sectoral de minimis state aid threshold, so that even if the claim for EA is successful the sectoral threshold will not be exceeded. See TAXguide 02/20.
Class 1A national insurance on termination payments
A new type of national insurance was introduced from 6 April 2020. Taxable termination payments in excess of £30,000 are now subject to employer’s NI for the first time and reportable under RTI. This liability (Class 1A) will not be calculated by payroll software, but must be calculated manually by an employer and inserted into the relevant field for monthly reporting via the full payment submission (FPS). It is reported in the FPS as a year-to-date figure and paid over alongside the Class 1 national insurance to the normal deadlines. The Class 1A is displayed on the employer’s business tax account and shown separately from the Class 1 liabilities. This will be particularly important for employers to factor into the costs of termination packages given the increased numbers of leavers due to COVID-19. Class 1A on continuing benefits post-termination, such as company cars, will continue to be reported on the P11D and paid over at year end.
Real time information (RTI)
Replacing the Earlier Year Update (EYU)
In 2019 HMRC introduced a new correction file to replace the Earlier Year Update (EYU). This has been very successful in improving the accuracy of corrections made to prior tax years. For the last two tax years there has been dual running of both the EYU and the new year-to-date (YTD) FPS. Effectively a YTD FPS is a Month 13 FPS – a new year-end report - for any employees that the employer wishes to amend for the prior year (or years). It can be sent at any time from 20 April onwards each year correcting the prior year. From 6 April 2021 the EYU will be abolished and employers will only be able to submit the new YTD FPS.
If your payroll software has already introduced the YTD FPS make sure you always use late reporting reason H against each entry. The payment date must also be equal to, or later than, the last payment date reported in that year. For example, a final FPS for the year is submitted on 30 March 2021, with a payment date of 30 March 2021, then in June 2021 an error is identified in the Month 12 FPS. The YTD FPS should include the final payment date of 30 March 2021 or later.
Christmas RTI easement
HMRC announced in the October 2019 Employer Bulletin that it would make permanent the easement that was introduced at the last minute in December 2018. HMRC has just issued a reminder to employers of the easement ahead of December 2020 payments (December 2020 Employer Bulletin). The easement relates to the ‘payment date’ (Field 43) being left as the contractual payment date in the FPS however early employees are paid in December.
This is because of the problems with Universal Credit (UC) when payments are brought forward, which particularly happens at Christmas. Anchoring the payment date in Field 43 to the contractual payment date should ensure that fewer people appear to have two payments in the same UC award period. This is even more important given that there are nearly 6m people in receipt of UC as at October 2020, with 38% of them in work. If for some reason an employer is not able to amend the payment date via their payroll software and the earlier actual date of payment is used to populate the field, employees should be made aware that DWP is now obliged to manually review UC awards that have been reduced by the ‘bunching’ of earnings.
There is also a filing easement each December in that the FPS can be sent on or before the contractual payment date (as detailed in paragraph 1.8 of the Employer further guide to PAYE and National Insurance contributions CWG2) rather than under the normal rule which is that filing must occur on, or before, the actual payment date.
A new student loan plan type will be introduced from 6 April 2021 as the Scottish Government is introducing Plan 4 loans for Scottish borrowers. A Scottish borrower is somebody who took out an undergraduate maintenance loan from the Student Awards Agency Scotland (SAAS). Currently such borrowers are allocated Plan 1 loans alongside English and Welsh borrowers who look out their loans pre-2012.
The Scottish Government has decided to raise the threshold for its borrowers to £25,000 which necessitates them being moved to a separate loan plan. In early March 2021 HMRC will issue 500,000 SL1 forms which will act as a ‘switch’ notice to instruct employers to move the affected borrowers to Plan 4 effective from 6 April 2021. These ‘switch’ notices will be in addition to the 500,000 SL1 notices being issued for new borrowers coming into repayment at the start of the 2021/22 tax year.
The thresholds for student loan deductions for 2021/22 are as follows:
|Plan 1||Plan 2 (England & Wales post-2012)||Plan 4 (Scotland)||Postgraduate (England & Wales) NO CHANGE|
Statutory parental bereavement pay (SPBP) and leave
Another statutory payment was introduced on 6 April 2020 providing for the first time a statutory right to time off, and in some cases pay, for bereaved parents who lose a child up to the age of 18 (including those who have suffered a stillbirth after week 24 of pregnancy). The right to one or two weeks of time off is a day one right, whereas payment is subject to service and earnings’ eligibility as with other statutory payments.
Eligibility for pay is measured over the eight weeks that fall before the Sunday at the start of the week in which the death occurs, and the employee needs 26 weeks’ service at that Sunday as well. If the employee has average weekly earnings of at least the lower earnings limit (£120 per week 2020/21) over that eight-week period, and the requisite service, they can receive payment at the standard rate for the year (£151.20 per week 2020/21) for either one or two weeks. Payments of SPBP are reported in the FPS and recovery is via the employer payment summary (EPS), with the same 92% or 103% recovery rates that apply to the other family related statutory payments. Somewhat surprisingly, single days cannot be taken, even though this may seem logical in order for the parents to attend a funeral or inquest.
However there are some key differences with this statutory payment as compared to the other family related payments:
- There is a wide range of employees who can benefit from SPBP and leave other than just the biological parents, as the legislation includes numerous individuals who can claim an emotional attachment to the child. Entitlement is focused more on who has responsibility as the "primary carer(s)" for the child and less on the legal status between the adult and the child.
- The right to pay and leave can be taken in a 56-week window from the date of death, allowing it to be added onto the end of, for example, maternity leave as SPBP/leave cannot interrupt another period of statutory payment. The 56-week window also addresses the fact that employees may wish to take some time off on the first anniversary of the child’s death or the child’s birthday.
- Employees will not be allowed to work at all during a week of parental bereavement leave.
- Notice to take leave in the first eight weeks after the death can be very informal for example just a phone call or email ahead of when the employee was due to work; for leave taken after the first eight weeks, a one-week notice requirement can be required, but can still be verbal. Evidence for payment and recovery of SPBP is self-certified (an online form is provided) and employers should not ask for documentary evidence such as a death certificate.
The weekly rates of all statutory payments have been announced for 2021/22 as follows, but not the Lower Earnings Limit or recovery rates at the time of writing:
- SMP, SPP, ShPP, SAP and SPBP £151.97 from week commencing 4 April 2021
- SSP £96.35 from 6 April 2021
In March 2020, HMRC published a revised new starter checklist without any employer or agent input. Revisions were made to the wording of statements A, B and C with the intention of making them clearer so that individuals are more likely to select the correct statement. Despite the guidance on Gov.uk saying it is not mandatory it is vital that all new starters complete a starter checklist, including deemed employees, in order that the correct tax code can be assigned and, in the case of actual employees, the correct student loan plan. A further version of the starter checklist will be introduced from 6 April 2021 to accommodate the introduction of student loan Plan 4. This will be available from February 2021, but has already been circulated to the payroll software developers.
A new version of the P60 is in use for year end 2020/21 (to accommodate statutory parental bereavement pay) and there will be another updated version for 2021/22 as a result of the introduction of Plan 4 student loans.
HMRC no longer provides the facility to order blank P45 and P60 stationery. It expects employers to be able to produce these from their payroll software or alternatively purchase forms from commercial suppliers. HMRC is encouraging individuals and employers to go paperless for tax coding notices. Employees can access their tax coding notices via their personal tax account and employers can view their employees’ coding notices via their business tax account.
From 6 April 2020 there were changes to the calculation of holiday pay in Great Britain (the rules in Northern Ireland remain unchanged and require employers only to look back 12 weeks). Holiday pay for four weeks of the holiday year, must be calculated based on a ‘normal remuneration’ calculated by looking back over the last 52 weeks where any remuneration was received for working. It follows that any weeks where an employee was fully furloughed, was on holiday or was not working at all are excluded. Employers are required to count back up to 104 weeks to find as many worked weeks as possible up to a maximum of 52.
Holiday pay calculations for the remaining 1.6 weeks of the holiday year can be based on the ‘value of a week’s pay’ which need not include the same pay elements as normal remuneration (which has been the subject of numerous court cases because it emanates from the EU Working Time Directive and the UK’s working time regulations).
National minimum wage
The government has announced the level of the national minimum wage to take effect from the first pay period that begins on, or after, 1 April 2021 as follows:
|April 2020||April 2021|
|Aged 25 and above||£8.72||£8.91|
|23 and 24-year-olds*||£8.20||£8.91|
|21 to 22-year-olds||£8.20||£8.36|
|18 to 20-year-olds||£6.45||£6.56|
|16 to 17-year-olds||£4.55||£4.62|
* The top rate will now be payable to those aged 23 and above
Benefits and expenses
COVID-19: benefits and expenses
There has been a number of changes to the handling of benefits in kind as a result of COVID-19 as follows.
- One change is for employees who have been required to work from home, as a result of government advice, to be able to claim tax relief for homeworking expenses. This was much more difficult historically as the employee had to be required to work from home, rather than this being a choice, in order to claim tax relief. Where an employee had voluntarily chosen to work from home the only option was for the employer to pay the homeworking allowance, which was increased to £6 per week/ £26 per month from 6 April 2020. The Financial Secretary to the Treasury announced in a Parliamentary written answer that employees required to work at home as a result of COVID-19 would be allowed to claim tax relief where they do not receive an employer-provided payment. To this end, HMRC introduced a new claim service. Claims can also be made by telephone, via form P87, an employee’s personal tax account or through self-assessment, and do not need to be pro-rated if the employee is only working at home some of the time, or has a part-time contract. HMRC is advising that as long as an individual has been required to work from home at some point in tax year 2020/21, they will accept a claim for homeworking relief for the whole tax year. Employees who are required to work from home in 2021/22 will have to make a new claim for relief.
- There is no benefit in kind in respect of employees using an employer’s equipment to work from home as any private use will be assumed to be insignificant so can be ignored.
- Where employees had to purchase equipment in order to work from home and were subsequently reimbursed by their employer HMRC has introduced an easement to the tax and national insurance position that strictly speaking would have made any cash reimbursement a pecuniary liability that would have required reporting. Legislation was introduced on 11 June 2020 and will be effective for the 2020/21 tax year. Through its collection and management powers HMRC will take the same approach from 16 March 2020 for 2019/20. Employees who retain this equipment if they subsequently return to the office will not face a benefit in kind charge in respect to the transfer of an asset.
- Employers who provide antigen tests to all employees will not be treated as providing a benefit in kind subject to all employees being able to access tests. Employees can also be reimbursed for the purchase of such tests without a pecuniary liability arising as above. Antigen tests are used to test for current infectivity, whereas antibody tests are used to detect previous infection and are not exempted.
- Where an employer has chosen to provide a virtual Christmas party, this will, as recently announced, qualify for the annual party exemption subject to the other qualifying criteria being met as normal.
- The benefit in kind for company cars will only be reduced if employees returned the keys to their employer during any lockdown period so are physically unable to use the car. Otherwise, HMRC will argue that the car was still available even if opportunities to use it were severely limited.
The introduction of a new CO2 testing regime for cars registered from 6 April 2020 necessitated the re-drawing of CO2 emissions’ values. Over the next few years company car drivers will see a significant hike in their company car benefit charge as values are adjusted over a period of time to meet the new regime. The only winners will be those drivers with low emission hybrid company cars where the emissions’ percentage is now dictated by the number of miles that the car can travel on one electric charge (this figure has to be reported on form P11D or through RTI if company cars are being payrolled). Drivers of fully electric cars registered before, or after, 6 April 2020 are subject to a 0% benefit in kind charge in 2020/21.
Final OpRA transition period ends
Certain benefits in kind, where the agreement to participate in an optional remuneration arrangement (OpRA) was made pre-6 April 2017 and has not been varied in the interim, were subject to a four-year transition to the new OpRA rules and that transition period comes to an end on 5 April 2021. During the four-year transition period the following benefits in kind continued to be valued for P11D purposes using the normal cash equivalent rules:
- School fees
- Cars with over 75g/km emissions
- Living accommodation.
For the 2021/22 tax year, the benefit in kind calculation will move to be calculated using the ‘modified cash equivalent’ rules, where the benefit in kind will be based on the higher of:
- the salary foregone, or
- the gross cash equivalent value before any reductions are made for unavailability or private use contributions from net pay.
The end of the transition period will affect employees who have:
- a Type A OpRA, (ie, they have chosen a benefit in kind in exchange for giving up some of their salary); or
- a Type B OpRA, (ie, they have chosen a benefit in kind and in so doing do not receive a cash allowance such as a car or housing allowance).
The increase in the benefit in kind for affected employees, and also the Class 1A liability for the employer, could be significant.